Overview

Investors Group Trust Co. Ltd. (IGTC or the Company) is a trust company continued under the Trust and Loan Companies Act (Canada) incorporated and domiciled in Canada. The Company is a wholly owned subsidiary of Investors Group Inc. and is ultimately controlled by Power Financial Corporation.

The Company provides trustee services and is an issuer of Guaranteed Investment Certificates and Term Certain Annuities. The Company’s assets are primarily invested in insured residential mortgage loans and in highly rated short-term securities.

The operations of IGTC are supported through outsourcing agreements with the Company’s parent, Investors Group Inc., and with other affiliated companies under common control. The officers of the Company are employed by affiliated companies and receive no remuneration from IGTC.

Capital Management

The Company’s capital management policy and practices are focused on maintaining a solid capital base and a strong balance sheet. The objective is to maintain a capital position which supports the Company’s business objectives and working capital requirements, and ensures all of its regulatory capital requirements are satisfied.

On an annual basis, a Capital Plan with a three-year horizon is prepared by management and is reviewed and approved by the Board of Directors (Board). The Capital Plan encompasses all the forecasted uses, sources and adequacy of capital. The Company manages its capital on an ongoing basis in accordance with the Capital Management & Dividend Policy which is reviewed and approved by the Board annually.

Regulatory capital requirements and capital ratios are determined in accordance with the Capital Adequacy Requirements Guideline issued by the Office of the Superintendent of Financial Institutions Canada (OSFI), based on standards issued by the Bank for International Settlements, Basel Committee on Banking Supervision.

Regulatory capital includes Common Equity Tier 1 (CET1), Tier 1 and Tier 2 Capital. CET1 Capital is the most permanent form of capital and is comprised of common shareholder’s equity less certain deductions, if applicable. Tier 1 Capital is comprised of CET1 Capital with additional items that consist of capital instruments such as certain preferred shares, net of certain deductions. Tier 2 Capital is primarily comprised of subordinated debentures and the eligible portion of the collective allowance for credit losses, net of certain Tier 2 Capital deductions. Total Capital includes Tier 1 and Tier 2 Capital.

The Company’s CET1 Capital, Tier 1 Capital and Total Capital are comprised solely of common shareholder’s equity.

As at December 31, 2016, the CET1 Capital Ratio, Tier 1 Capital Ratio, Total Capital Ratio and Leverage Ratio are the primary regulatory capital measures.

OSFI establishes minimum risk-based capital targets for deposit-taking institutions in Canada. These minimum targets are a CET1 Capital Ratio of 7%, Tier 1 Capital Ratio of 8.5%, and a Total Capital Ratio of 10.5%. Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by risk weighted assets. The Company uses the Standardized Approach to determine risk weighted assets for credit risk, and uses the Basic Indicator Approach to determine risk weighted assets for operational risk. The Company does not manage a trading book and therefore is not subject to capital requirements related to this type of market based activity.

The Leverage Ratio is a non risk-adjusted view of a company’s leverage and is calculated by dividing Tier 1 Capital by total assets. OSFI has established confidential minimum Leverage Ratio targets unique to each institution .

As at December 31, 2016, the Company’s Capital Ratios and its Leverage Ratio were well above both OSFI’s regulatory requirements and the requirements of the Company’s Capital Management & Dividend Policy. The Company’s Regulatory Capital, Capital Ratios, and Leverage Ratio at December 31, 2016, are detailed below.

In addition to meeting capital requirements specified in the CAR Guideline issued by OSFI, the Company also conducts its own assessment of the adequacy of its capital through an Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP, which is completed on a periodic basis, addresses all material risks faced by the Company as they relate to the adequacy of capital. This includes risks explicitly captured in the minimum regulatory capital requirements as well as material risks not fully captured under the CAR Guideline. The Company utilizes the ICAAP in concert with the Capital Plan and the minimum requirements set out in the CAR Guideline to assess the adequacy of its capital to support current and future activities. The most recent ICAAP was completed in the third quarter of 2016 and was reviewed and approved by the Board.

Management measures its capital position and its compliance with both regulatory requirements and the Company’s Capital Management & Dividend Policy and reports to the Investment and Conduct Review Committee of the Board on a quarterly basis.

The Company’s capital management activities for the year ended December 31, 2016 included the declaration and payment of common share dividends of $1.5 million.

Risk management overview

The Company’s strategy and its business activities are supported by a risk management framework that defines appetite for risk, through which policies and guidelines are established for each major category of risk. Supporting this risk management framework is a governance structure which includes oversight by the Board, the Audit Committee and the Investment Conduct and Review Committee of the Board. The Board reviews and approves all of the Company’s risk management policies on an annual basis. Management reports on a regular basis to the Investment and Conduct Review Committee, the Audit Committee, and the Board on compliance with the Company’s risk management policies. The Company also benefits from the enterprise-wide risk management framework of its parent company.

The Company actively manages its liquidity and funding, credit, market, and operational risks.

Liquidity and funding risk

Liquidity and funding risk is the risk of the inability to generate or obtain sufficient cash in a timely and cost-effective manner to meet contractual or anticipated commitments as they become due or arise.

Liquidity management for the Company is based on the Liquidity Management Policy, which is reviewed and approved by the Board on an annual basis. As at December 31, 2016, the Company’s liquidity position was in compliance with the Liquidity Management Policy.

The Company’s liquidity management practices include controls over liquidity management processes, stress testing of various operating scenarios, and oversight of liquidity management by the Investment and Conduct Review Committee of the Board.

As required by the Liquidity Management Policy, a Liquidity Plan with a three-year horizon is prepared by management on an annual basis and is reviewed and approved by the Board. The Liquidity Plan considers regulatory requirements and the effect on liquidity of changes in the Company’s business, operational and financial position. In addition, on an annual basis a Liquidity Contingency Plan is prepared by management for review and approval by the Investment Conduct and Review Committee of the Board. The Liquidity Contingency Plan outlines the Company’s liquidity requirements and funding strategies under different stress scenarios.

The Company also monitors its liquidity position on a monthly basis as required by OSFI’s Liquidity Adequacy Requirements Guideline. In accordance with this guideline, the Company reports its Liquidity Coverage Ratio (LCR) and its Net Cumulative Cash Flow (NCCF) to OSFI on a monthly basis. The LCR, which is a minimum regulatory liquidity standard, requires regulated financial institutions to maintain a sufficient stock of high-quality liquid assets to cover a minimum of 30 days of net cumulative cash flow requirements in a stressed environment. The NCCF measures detailed cash flows over and up to a 12 month time horizon. In April 2016, OSFI introduced a new regulatory metric called the NCCF Survival Horizon. This metric mandates a minimum number of months from the reporting date that an institution must maintain a positive net cash flow. OSFI established confidential minimum NCCF Survival Horizon targets unique to each institution.

As at December 31, 2016, the Company’s LCR and NCCF Survival Horizon were in excess of OSFI requirements.

In addition to the Company’s current balance of cash and cash equivalents, other potential sources of liquidity include access to a line of credit with a Schedule I Canadian bank through IGM Financial Inc., the parent company of Investors Group Inc. The Company has not utilized this facility as of December 31, 2016.

The Company’s liquidity position and its management of liquidity risk have not changed materially since December 31, 2015.

Credit risk

Credit risk is the potential for financial loss to the Company if a counterparty to a transaction fails to meet its obligations. The Company’s cash and cash equivalents and mortgage loans are subject to credit risk. The Company monitors its credit risk management practices on an ongoing basis to evaluate their effectiveness.

The Company manages credit risk related to cash and cash equivalents and mortgage loans by adhering to its Investment and Interest Rate Risk Management Policy, which is reviewed and approved by the Board on an annual basis. The Investment and Interest Rate Risk Management Policy outlines credit risk parameters and concentration limits. The Company does not utilize derivative financial instruments.

At December 31, 2016, the Company’s cash and cash equivalents consisted of cash balances on deposit with Canadian chartered banks and Government of Canada treasury bills. The Company regularly reviews the credit ratings of its counterparties.

The Company regularly reviews the credit quality of its mortgage loan portfolio and the adequacy of the collective allowance for credit losses. For further information on mortgages please see the Mortgage portfolio details section of this report below.

The Company’s exposure to and management of credit risk have not changed materially since December 31, 2015.

Market risk

Market risk is the potential for loss to the Company from changes in the values of its financial instruments due to changes in foreign exchange rates, interest rates, or equity prices. The Company’s financial instruments are denominated in Canadian dollars and, therefore, are not subject to risks related to foreign exchange rates. The Company has no equity security holdings and does not utilize derivative financial instruments and is therefore not exposed to equity price risk.

Interest rate risk

The Company is exposed to interest rate risk to the extent that deposit assets and deposit liabilities mature or re-price at different points in time.

The objective of the Company’s asset and liability management is to control interest rate risk by actively managing its interest rate exposure in adherence with its Investment and Interest Rate Risk Management Policy which sets mismatch limits between deposit liabilities and the assets backing those liabilities. As at December 31, 2016, the Company was in compliance with the mismatch limits set out in the Investment and Interest Rate Risk Management Policy.

The table below reflects the impact on Net earnings from an immediate parallel increase or decrease of 100 basis points in the yield curve:

As at December 31
(in thousands of dollars)

2016

2015

100 basis point increase

24

25

100 basis point decrease(1)

(11)

(15)

(1)Net earnings exposure is calculated by measuring the impact of a decline in interest rates where the resultant interest rate does not become negative.

Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Company manages operational risk through outsourcing arrangements with the Company’s parent and affiliated companies in accordance with the Company’s Outsourcing Policy which is reviewed and approved by the Board on an annual basis. Operational risk is managed through the detailed control processes, and the risk avoidance and risk mitigation strategies employed by the Company and the affiliates which are party to the outsourcing agreements.

Mortgage portfolio details

As at December 31, 2016, mortgages totaled $21.8 million. The mortgage portfolio was 100% insured, 100% residential and geographically diverse.

There were no impaired loans. The collective allowance for credit losses was $170 thousand at December 31, 2016.

All loans in the portfolio had remaining amortization periods of 25 years or less as of December 31, 2016.

The geographic distribution of the loans in the Company’s mortgage portfolio was within Investment Policy limits as at December 31, 2016, and was as follows:

Atlantic Canada

9.6%

Quebec

26.5%

Ontario

33.3%

Manitoba/Saskatchewan

9.8%

Alberta

12.0%

British Columbia

8.8%

Territories

0.0%

Designated office for support orders and support provisions

In compliance with the Support Orders and Support Provisions (Trust and Loan Companies) Regulations established under the Act, the following location has been designated for the service of all enforcement notices on Investors Group Trust Co. Ltd. across Canada.